American Airlines: Bankrupt Victim of Weak U.S. Dollar Policies

John Tamny
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As is well known now, American Airlines filed for bankruptcy toward the end of last year. In one certain sense this shouldn’t surprise us given how its legacy competitors did much the same earlier in the new millennium.

After that, the origins of our best-known and oldest air carriers perhaps foretold their modern problems in ways most don’t understand today. As T.A. Heppenheimer put it in his 1994 book Turbulent Skies, "Government actions brought forth the first air carriers in both Europe and the United States." Rather than creations of the private sector, politicians formed notable carriers such as American (and TWA, which it acquired not long ago) as a way of moving mail around the country.

And as creations of the state, it would be easy to argue that many of our biggest carriers possess sclerotic cultures that are inimical to profit. Lacking true private-sector origins, there are entrepreneurial inadequacies within many of the original airlines that have made it difficult for them to prosper in an economic climate that has, until recently, somewhat embraced a laissez-faire attitude toward business.

Of course today’s explanation for American’s problems center on employee and employee pension costs that American failed to address years earlier as its competitors did. To believe media accounts on American’s bankruptcy today, the latter airline’s filing was inevitable for it not having done so years ago.

The problem with the above assertion, however, is that while it was never a growth stock in modern times, American traded at $24 as recently as 2000, and in January of 2004 its shares floated in the $17 range. And with stock prices most useful as discounting data for the future, if bankruptcy for American was inevitable, this would have been priced into its shares long ago.

Also, implicit in today’s popular narrative is that American’s compensation structure was well out of line with the rest of the industry. But if true, it seems American would have attracted higher quality employees; something that frequent flyers would question for the airline’s on-time record alone.

So if it’s agreed that something else explains American’s filing, a good place to look in order to truly understand its modern demise is the decline of the U.S. dollar over the last 10 years. The latter is the one thing American didn’t have control over, and it ultimately crushed the airline.

To understand why, it has to be remembered that oil is priced in dollars, and when the dollar declines as it has since 2001, the commodities in which it’s priced increase. Never in the last 10 years has oil been expensive, instead the dollar has been cheap.

The logical answer to the above is that all airlines, including American, deploy hedging strategies to work around oil price fluctuations that naturally feed into fuel costs necessary to transport their passengers. That’s no doubt true, but as became apparent years ago, Southwest Airlines was one of the few carriers that properly hedged its exposure to fuel prices that were set to go through the roof. American apparently did not hedge effectively, and having failed to do so, its dollar costs of transport in recent years have moved up substantially.

On its own this would have presented problems for American, and any other carrier that failed to hedge fuel-price spikes that were rooted in a weak dollar. Sadly, the story doesn’t end there.

Indeed, while the Justice Department would have us believe that there’s not enough competition in the airline space (evidence here its occasional aversion to mergers involving domestic carriers, and the laws against combination with foreign ones), anyone who has flown since deregulation began in the late ‘70s knows that competition for fliers is intense. And because it’s intense, flying hasn’t since the late ‘70s hasn’t been very expensive.

Despite this, and as evidenced by the fairly good performance of American’s shares at certain times, it seems airlines adapted to the fare competition, and even thrived. Competition didn’t kill the airlines, though reduced barriers to M&A activity within the sector would certainly make them healthier. The latter is of course not in the cards given the earlier point that as creations of a political class ever eager to avoid “monopoly”, truly efficient combinations will never occur.